CMGE Technology Group (HKG:302) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at CMGE Technology Group (HKG:302) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for CMGE Technology Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0008 = CN¥4.8m ÷ (CN¥7.1b - CN¥1.0b) (Based on the trailing twelve months to June 2023).

Therefore, CMGE Technology Group has an ROCE of 0.08%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 6.6%.

See our latest analysis for CMGE Technology Group

Above you can see how the current ROCE for CMGE Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CMGE Technology Group.

What Does the ROCE Trend For CMGE Technology Group Tell Us?

When we looked at the ROCE trend at CMGE Technology Group, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 0.08%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From CMGE Technology Group's ROCE

Bringing it all together, while we're somewhat encouraged by CMGE Technology Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 66% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in CMGE Technology Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.